eRupee: India’s Response to the Digital Currency
What is the central bank digital currency? We attempt to answer some often asked questions about RBI's latest effort
Ever since crypto currencies captured the imagination of the investors, India has been taking one step forward and a step back in its journey on whether to accept it or not. In the interim, the government set up a working group to study the possibility of launching a central bank digital currency or CBDC. This committee submitted its report on October 7, 2022.
What’s the eRupee?
As readers would recall, the CBDC was announced during the Union Budget earlier this year. The RBI then took up the onus to create a digital rupee and outlined what it would mean to the country and its population. Our attempt here is to bring you all that’s been planned, is being planned and what it could mean for us, the people…
Quite simply the eRupee is a digital currency of the Indian rupee. The RBI has proposed two versions of the currency – one that works in a wholesale format for interbank settlements and the other for the public as retail money. RBI has proposed that an individual can hold the eRupee in a wallet with a bank or a service provider.
How similar is it to crypto currency?
The distributed ledger system that underlines crypto currencies could work for the eRupee as well, but RBI is silent on this as of now. However, the one big difference is that unlike the popular bitcoin or ethereum that are private currencies, the digital rupee would be issued and also be controlled by the Central Bank.
Moreover, RBI will be issuing the eRupee. Which means privately it cannot be mined like bitcoin, making it free from some of the energy and sustainability concerns that has governed these private crypto currencies. The RBi has proposed a model where it issues the eRupee for commercial banks to distribute.
How would eRupee function?
For starters, the retail version of the eRupee would be tokenized. This means that one finds out a recipient’s public key (a digital identifier) and transfers the funds to them using your own private key that is password protected. However, RBI is clear that they do not favor any interest on the eRupee because due to the fear that people may convert actual currency into digital ones, resulting in the real possibility of banks failing.
Since the bank transfer goes from one identified person to another, it is not anonymous as say a cash transfer. RBI has proposed partial anonymity where small accounts can be nameless but not with large amounts. We are not really sure how this functions and what would get listed as a small account versus a large account.
What’s in it for you and me?
The one reason why users can hold eRupee is the convenience as there would be no more need to carry around physical notes or coins. There are a few other benefits for the country such as financial inclusion, innovation and lower transaction costs.
Though this one isn’t yet clear, RBI notes that the eRupee could be programmed for use only in specific purposes in a sector of the economy such as agriculture. Or it could get a limited life such as a voucher that allows the Central Bank to respond to stimulus or create one. Since there are bound to be trade-offs with such as a system, RBI hasn’t really opened up on it.
And finally, the RBI has also proposed offline functions for the eRupee which means one can transact without the internet. However, there is a worry around duplication where the same digital rupee could get transferred to multiple people, for which RBI is considering limits in the case of offline transactions in order to ensure digital synchronization.
